Market Overview
The trend of extreme market narrowness persisted during the quarter, as chipmaker Nvidia (NVDA) continued its extraordinary rally, briefly surpassing Microsoft (MSFT) as the world’s largest company and driving nearly half of the S&P 500 Index’s (SP500, SPX) returns during the period. The quarter was also marked by improving investor sentiment about the economy and the outlook for interest rates, as several months of encouraging inflation data revived hopes that the Fed will begin a monetary easing cycle this year. Other economic data were mixed during the quarter, as the economy continued to add jobs at a robust pace, but first-quarter GDP came in below expectations, hurt by slower consumer spending. However, the conclusion of the first-quarter earnings season painted an encouraging picture of how corporate profits have held up against interest-rate headwinds. According to FactSet data, 80% of the companies in the S&P 500 Index topped consensus estimates, and first-quarter earnings grew 6.0% from a year earlier.
Against this backdrop, the S&P 500 Index advanced 4.3% in the second quarter, raising its year-to-date gain to 15.3%. (Index performance is measured as a total return and in US dollar terms.)
Portfolio Review
In the second quarter, the Lazard US Equity Focus Portfolio (MUTF:LZUSX) rose 1.9%, underperforming the 4.3% return of its benchmark, the S&P 500 Index. (Portfolio return is measured net of fees and in US dollar terms.)
Contributors
Stock selection in communication services: Google parent Alphabet (GOOG,GOOGL, 6.7% weighting in the Portfolio) reported solid results, including strong expense management, margin expansion, investments in artificial intelligence, and returns of free cash flow to shareholders. We continue to like Alphabet’s significant barriers and advantages in its core search business and the company’s ability to innovate at scale, driving growth and creating new adjacent opportunities.
Stock selection in the financials sector: Goldman Sachs (GS, 3.8% weighting) reported strong quarterly results, driven by strong revenues in its markets and investment banking segments coupled with a lower-than-expected provision for credit losses. We think Goldman Sachs can improve its returns, driven by a combination of investment banking fees recovering from cyclical lows and a transition of the asset management business toward a more fee-based model.
Detractors
Stock selection in consumer staples: Estée Lauder (EL, 1.1% weighting), a prestige beauty company, reported strong earnings, and an inflection in sales growth and gross margin, as well as an improvement in inventories. However, the stock fell on lower-than- expected Q4 guidance and concerns around consumer/macro data points. We continue to own Estée Lauder as we expect the company’s margin and return profile to recover to historic highs and that structural changes in the fragrance and US businesses, expected profit improvement in makeup, and changes in the company’s Asian manufacturing footprint will provide multi-year tailwinds.
Stock selection and an underweight position in information technology: Shares of Accenture (ACN, 2.6% weighting) lagged after the company announced plans to purchase Unlimited, an integrated customer engagement agency, the latest in a series of investments the company has announced despite an uncertain macro environment and management’s expectations for a slower improvement in the second half of 2024. However, we think Accenture is well-positioned, as more enterprises need to move to the cloud, upgrade data, and digitize their business processes before they can adopt and integrate AI into their organizations. We continue to expect Accenture to continue to benefit from these structural growth opportunities and gain a larger share of customer budgets.
Outlook
We expect to see continued volatility as the Fed and other central banks seek to balance the goals of maintaining financial stability and controlling inflation. While artificial intelligence has the potential to transform the way companies operate over the long term, we are cautious that the exuberance surrounding it may drive valuations in certain stocks to unsustainable levels in the short term. We remain focused on our philosophy of investing a majority of the portfolio in quality companies (Compounders) that can sustain elevated levels of financial productivity and supplementing them with companies that we believe can improve their financial productivity (Improvers). A broadening out of index participation will present a better environment for quality investing, and we believe that the empirical work done by co-lead portfolio manager/analyst Louis Florentin-Lee in Relative Value Investing and its update, Quality Investing, shows that our philosophy is one that should deliver outperformance over time.
Important Information Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For more complete information about The Lazard Funds, Inc. and current performance, you may obtain a prospectus or summary prospectus by calling 800-823-6300 or going to www.lazardassetmanagement.com. Read the prospectus or summary prospectus carefully before you invest. The prospectus and summary prospectus contain investment objectives, risks, charges, expenses, and other information about the Portfolio and The Lazard Funds that may not be detailed in this document. The Lazard Funds are distributed by Lazard Asset Management Securities LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its affiliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. The performance quoted represents past performance. Past performance does not guarantee future results. The current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end online at www.lazardassetmanagement.com. The investment return and principal value of the Portfolio will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. Different share classes may have different returns and different investment minimums. Please click here for standardized returns: https://www.lazardassetmanagement.com/us/en_us/funds/mutual-funds/lazard-us-strategic-equity-portfolio/F133/S80/ Allocations and security selection are subject to change. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. The S&P 500 Index is a market capitalization-weighted index of 500 companies in leading industries of the US economy. The index is unmanaged and has no fees. One cannot invest directly in an index. Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward- looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. |
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